FLM: Market Power and Price Exposure: Learning from Changes in Renewables’ Regulation

Imelda is Assistant Professor of Economics at the University Institute in Geneva.

Market Power and Price Exposure: Learning from Changes in Renewables’ Regulation

Abstract :
We provide theoretical and empirical results on the market power implications of different types of renewable energy support schemes in electricity markets. In particular, we seek to understand how the exposure of renewables to wholesale price fluctuations affects the overall degree of market power. Theoretically, we find that protecting renewables from price fluctuations is effective in limiting market power in relatively concentrated markets. Empirically, we take advantage of several short-lived changes in support mechanisms for renewables in the Spanish electricity market and find that the shift from fixed to market-based pricing led to a reduction of the average price-cost margin by 2-4%.